Everyone knows that long term inflation is baked into the cake at this point… or maybe not? Andy explains the case for long term secular deflation (hint: it involves demographics). Plus: Trump announces that he agrees with Hillary Clinton, and believes that crypto is dangerous.
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Inflation Watch: US Money Supply to Stay Elevated Despite Coming Slowdown, Pantheon Says: “The near 40% jump in the U.S. money supply over the past year sparked concerns about rising inflation, especially in bond markets like U.S. Treasurys. In cryptocurrencies, investors have leaned into bitcoin (BTC) as a potential hedge against inflation, as governments and central banks around the world unleashed massive amounts of economic stimulus.” (CoinDesk)
After 20 years, Japan still stuck in deflationary mindset: Kuroda: “Even after two decades of aggressive monetary easing, Japanese people have not been able to shake off their deflationary mindset, Bank of Japan Gov. Haruhiko Kuroda told Nikkei, pledging to stay the course until inflation stabilizes at 2%.” (Nikkei Asia); Also: The village with dolls but no children – and Japan’s existential crisis (CNA)
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Cryptogic is THE show for crypto investors who are focused on long term results. Follow Scott Hawksworth and Andy Hagans as they explore the investable world of blockchain technology, NFTs, Bitcoin, Ethererum, and other cryptocurrencies.
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– [Scott] Hey, how’s it going? Scott Hawksworth with you. And welcome to another episode of “Cryptogic.” I’m excited about this one. It is December 28th, 2021. Hope your holidays were good. We got a lot to talk about today and I am once again joined by Andy Hagans, who’s the co-founder of Cryptogic, also the co-founder of The Alternative Investment Database.
Andy, welcome once again. How are you doing?
– [Andy] I’m doing great, Scott. How are you today?
– I’m doing great. I flew back from Philly seeing family. We flew with my daughter for the first time and it actually went pretty well. I was shocked. I’d like to thank Jeff Bezos, the shareholders of Disney, and all of those guys for great tablets and shows that toddlers will watch.
– Ought to start them early.
– Exactly. Start them early. I don’t know how parents did it before. I really don’t. But anyway, how was your Christmas?
– It was good. It was good. Yeah. Had a little time to relax. And now we’re having a little blizzard here in Michigan.
– So there you go.
– Not a real blizzard…
– Not exactly a white Christmas but, you know, close.
– Exactly. It’s not really a blizzard, but it’s snowing. It’s snowing pretty hard.
– Sure. All right. Well, we have a lot to talk about today. And some of it I think is really going to connect to what we were discussing in the last episode. But to kick things off, I thought it was pretty interesting you sent this over to me and we’re going to talk a little politics here. Donald Trump warned that crypto is a very dangerous thing.
– [Donald] I want a currency called the dollar. I don’t want to have all these others… I think it’s a very dangerous thing.
– So there you have it. Crypto is a very dangerous thing. Donald Trump likes the dollar. Andy, what’s your take?
– Well, I actually thought it was refreshingly honest. I think crypto is a dangerous thing depending on who you are and what your goals are. And Scott, you know, as I sent over that other link, I think the most interesting thing is that, you know, in his Trumpian way, he said almost the same exact thing that Hillary Clinton said a couple of weeks ago that crypto is “dangerous” because it threatens the dollar.
It threatens other currencies that are issued by nation-states. Actually, in both cases, I thought it was pretty honest that they don’t like crypto and they don’t like the idea of another currency that could potentially be an alternative store of value to the U.S. dollar.
And the thing is both Hillary Clinton and Donald Trump, you have a former president, you have somebody who was almost president, they like power in the executive branch, right? Like, you typically don’t run for president or become president and say, I don’t like having this powerful executive branch.
I don’t like personally holding any power. I’d rather just we live in a more libertarian way and just sort of devolve power to our citizens and decentralize it. So I think both of them is just a very almost just an honest reaction that crypto is sort of a dangerous threat, I guess, to the status quo.
– Well, it’s dangerous to the status quo. Exactly. That’s what I was going to say. I mean, I think that whether it’s Trump or Clinton, you know, they are part of the status quo in some way. And that makes sense to me that this kind of new thing that, yeah, does have a lot of volatility, that does have a lot of uncertainty in it, that they could say, you know what?
This actually threatens the U.S. dollar and threatens the way we’ve always done things. So I’m not a fan.
– Right. Yeah. And, you know, if you look at the past year or two, like any other political issue, it’s sort of becoming nationalized. And I mean, I hate to say it, it looks like, you know, the parties are sort of sorting themselves and like the Democrats are going to be the anti-crypto party and the Republicans are going to be the pro-crypto party, but with a lot of exceptions though, a lot of exceptions on an individual basis.
And I think Trump has always been willing to sort of buck the Republican Party when he wants to, especially the more libertarian wing of the Republican Party. So I think this is just another example of that. You know it, but again, even Senator Elizabeth Warren. Even recently was bashing crypto and specific…
– Specific DeFi.
– Yeah. DeFi. And, you know, Scott, this one I thought was interesting. So I referred to President Trump and Secretary Clinton as being honest with their reactions to crypto. This reaction or this statement from Senator Warren, to me it’s a little bit more cynical, right? I mean, she brands herself as, you know, the sort of progressive populist who’s sort of standing up for the little guy against this traditional banking system with all of these fat cat bankers or whatever.
So for her to come out against DeFi, which, I mean, what else is threatening the big banks or the traditional financial system besides…
– What else but DeFi?
– Yeah. So it’s like, did she think this through or is she just trying to get a soundbite out there and, you know, be in the media cycle for 24 hours? And I think it’s the latter because I don’t actually think she’s ignorant. I mean, so to me, this is just more of a cynical way to sort of get in the news cycle and, you know, get quoted in “The New York Times” and get a little buzz online.
It was not really anything more substantive than that. But I mean, overall, there is a trend though. You know, people like power, people in government like power. They like to centralize it and then use that power. Power corrupts and absolute power corrupts absolutely, right?
– So, of course, anything that decentralizes power is not really going to be that popular amongst politicians. But I do think, you know, just like everything else in our national politic, it’s going to get sorted and it’s going to just be this yet another tribal issue most likely. And, you know, Scott, think about the internet when they, you know, in the late ’90s, if you can remember that long.
Seems like several lifetimes ago, but it was clear that the internet was going to be a thing, right? And the government, the federal government was kind of like, “What do we do with this?” And they sort of on purpose slowed down on regulating it and taxing it under the idea of, well, let’s see what this is.
Let’s let it, you know, grow a little bit, get its legs out under it because if it eventually grows into this great big industry, first of all, if we let it run a little bit, we’ll know what it is a little more. We’ll understand it better to be able to better regulate it. And then secondly, if it can mature into this large industry, then, you know, the eventual taxes that it generates, taxable revenue for the government that it generates…
– That could be a win.
– Exactly. So, I mean, I think there are some politicians that sort of get that and that sort of have that philosophy that, you know, crypto and DeFi are still in these very early stages. And, you know, we don’t want a major blow-up. We don’t want a meltdown or some sort of crisis in our financial system, but at the same time, if we overregulate it and overtax it, what’s going to happen?
It’s still going to exist. It’s going to move overseas. And, you know, entrepreneurs and VC money, they’re going to move to other jurisdiction and they’re still going to build the same exact thing, except now it’s going to be creating tax revenue for another country rather than for the United States. So I really hope that policymakers and politicians can, you know, be a little less shortsighted.
And I mean, shoot, even if you’re a socialist and you want really, really high taxes and you want to regulate the heck out of crypto, it still would behoove you, I think, to let the industry sort of organically grow within the United States and support it in its early ages because, you know, that’s going to be the eventual tax base as it grows larger and larger.
– You know what, Andy, as you were saying that, I was reminded, I think it’s China because we know, you know, they’ve tried to crack down on crypto a number of times. You know, they’ve been critical of the U.S. in terms of the U.S. is more, I guess, slow to regulate and allowing, you know, more of crypto to flourish. And they’ve kind of said, oh, I think that’s a mistake.
You shouldn’t be doing that. So I think that kind of does speak to the philosophy that you are talking about. And then if I may, I do also have a cynical viewpoint a bit of I do think that there are some politicians that don’t necessarily understand much at all about it, and they kind of fear what they don’t understand too. So maybe there’s some that are being more calculating and saying, hey, let’s let this all play out, but I think there’s others that just don’t get it.
You know, you have these Senate hearings, even the internet, you know, you were talking about the early days of the internet. You have hearings where, you know, Mark Zuckerberg is there and he’s busy explaining what a cookie is. So there’s still a lack of understanding I think, too, throughout the political spectrum. So when you look at this, I think that, you know, misunderstanding often leads to fear and so there’s sometimes words of caution that can come out from that.
– And bad policy.
– You mentioned the CCP, Chinese Communist Party, you know, in China banning Bitcoin and being afraid of crypto. Of course, they want absolute control over their citizens, they’re authoritarian government that oppresses their citizens. So the idea of this decentralized financial system that gives citizens more control…
– That’s a real threat.
– Of course, it threatens them, but talk about a bullish signal. The CCP bans something, I want to invest in that.
– Absolutely. So okay, kind of shifting gears, maybe a bullish symbol, we talked a lot about inflation and the sort of inflationary cycle we’re in Andy. And you were talking about that on our last episode about how you expect that’s going to continue. You don’t see how that’s going to necessarily get derailed.
And then you look at things like the money supply and how we know over the last several quarters here, the money supply has increased significantly. So I guess my question, Andy, is that there’s this other side where you have some really smart people that know a lot about investing and have a lot of interesting viewpoints saying actually we’re in a deflationary cycle.
Andy, what is your take on this…
– Long term cycle.
– Long term, exactly.
– So what’s your take on this? Is it going to…you know, how does this all impact when you’re talking about, you know, the inflationary cycle we’re in now versus, oh, actually there’s going to be a long-term secular deflationary cycle?
– So you’re asking which argument wins?
– Yeah, basically.
– Well, let’s walk through both arguments, Scott, and then you can tell me which argument wins, okay? On the pro inflation side, short-term, long-term. Short term, to me it’s simple. Higher inflation is going to sustain in the short-term because even if you put all of this monetary policy inside, like that link that you just brought up about, you know, the monetary supply increasing, what was it?
Forty percent last year. Even if you put that aside, the inflation that we’re experiencing right now is supply chain-driven, or at least a lot of it is supply chain-driven, right? It’s too much money chasing too few goods and services, right? So even put aside the money, half of that equation, you still have the goods and services half. And so with all of the policy decisions that we’ve made with these COVID lockdowns in the past 18 months, that really had a terrible impact on the supply chain.
And even if though all of…you know, some of those poorly thought out policies were reversed right now today, it would take 12, 18, 24 months for that to unwind for it to unclog, so to speak. So I think in the short-term, I don’t know if anyone is really arguing…well, besides President Biden, but I don’t think anyone is really arguing that, you know, this is truly transitory as in, in Q1, inflation will be back down to 2%…
– This is all going away. It’s going to go back to normal. We’re all set.
– Right. Because the supply chain is still going to be screwed up even into Q1 of 2022.
– So in that, you know, near term, one to two-year time horizon, I think most people are in agreement that we’re going to see sustained higher inflation. As far as that, you know, longer-term secular cycle of inflation, you know, you have the monetary policies, Scott, and, you know, again, that link that you brought up. But you also have the fact that in the United States, you know, we have these entitlement programs and we have long-term deficits and debt that many people view as unsustainable, right?
That it’s not sustainable given our power to tax our population and our GDP that, you know, these entitlement programs that we’ve promised are going to be too expensive. And ultimately, when governments get really big into debt and there’s no way out, it turns out there’s one way out, which is to debase your currency, right?
And it’s a tale as old as time. And, you know, goes back even before the Roman empire where governments would get into debt and they would debase their currency and inflate their way out of the debt. So I think a lot of people think, well, that’s that long-term inflationary supercycle. And, you know, to be fair, even though CPI before 2021, it had been pretty low for the last couple of decades.
It was like, have we permanently beat inflation? You know, it was a question that I think some people were asking. But I think some inflation hawks would point out that the CPI is not necessarily the “real inflation rate,” right?
Everyone has their own inflation rate. So if your medical costs are going up 10% a year, if you’re paying your kids’ way through college and that cost is going up 10% a year, if real estate’s going up 6% a year, if all of these costs are going up, you know, 5%, 10%, or more per year, how do you end up with a 2.5% CPI? Well, you know, we could write a whole book about the different ways that CPI is gained and is very subjective.
So I think a lot of people think that, you know, the real inflation rate has been underreported for a long time. So actually, it’s been higher. And then when you factor in, you know, entitlement programs, deficit spending, national debt growing, I mean, just look how much our national debt has grown even in the past 18 months, you know, it’s incredible.
And they conclude the only way that we’re going to get out of this is debasing our currency. And that means inflation. And a lot of Bitcoin investors, I think believe that story. And they view Bitcoin as a digital gold, they may own actual physical gold as well, but they view Bitcoin as a physical gold, as a place that you can park some wealth where it won’t necessarily be subject to that currency debasement.
– So that’s that side, but then there’s this argument of, you know, when people look at Japan, for example, and they say, actually, yes, okay, that’s where this is now. But when you look long-term, you look at, you know, the shrinking size of families, you know, fewer children being born, all of this, that actually there is this long-term deflationary mindset that is going to take place.
And I’m just curious to your take on that.
– Well, more than a mindset, Scott. I wouldn’t just call it a mindset. I mean, it is a mindset and I think, you know, that link I sent you kind of discusses that people’s expectations of inflation or deflation, you know, can almost become a self-sustaining prophecy. But a lot of investors will point to Japan and say, look where Japan is now, the United States will be there in a decade or two because, in some ways, Japan has been ahead of the curve.
And so if you look at Japan, everyone intends to think of Tokyo and this huge population and teeny apartments and all that sort of thing. But actually, if you go around Japan, there’s a lot of towns and, you know, more rural areas that have been depopulated because the birth rate has been so low in Japan for very long time, it’s created a demographic crisis where they just can’t sustain any positive inflation, right?
And they want a little bit of inflation, right? They want, you know, maybe 2% inflation or 1.5% inflation if they could just sustain that. And they can’t. And, I mean, they’ve been fighting deflation for a couple of decades in Japan and they just can’t beat it. And so, you know, think about, Scott, you know, the population growth that we’ve had in the United States.
You have the greatest generation, right? Fought in World War II. And then what came after them, you know, then you have the baby boomers.
– Boomers. Yep.
– And so when the baby boomers came of age and got married and had kids, they all needed to go out and buy houses, right? So what’s that going to do to the price of housing when you have, you know, a huge and growing demand entering the market and buying more housing? Inflation, right? The price of houses is going to go up. And so we saw higher inflation in the 1970s and into the 1980s in the United States.
But now look what’s happening now in the United States. The birth rate is what, 1.6, and it keeps trending lower and lower. And so what’s going to happen to all of this housing, you know, in 20, 25 years, especially in smaller towns or maybe cities that aren’t the hot places to live right now, think of Detroit where you can go buy a house for $1,000.
Now these are huge national trends, right? And I’m mentioning like cities and towns, villages, rural areas, both in Japan and the United States. Of course, there are still places in the United States where it’d be very, very bullish on real estate. But the fact is if you have a shrinking population, the overall demand for housing and other goods and services is going to go down, right?
And consumers peak in their consumption habits in their ’40s and early ’50s right when they were at their peak earning power. So, you know, as we have this aging population and if our birth rate is negative, your last option then, Scott, to maintain that positive growth and positive inflation is immigration.
And so that’s where the United States has historically been different in Japan. So when people say, “Hey, we’re going to be where Japan is in 10 years.” I’d say, “Not so fast. We have very different immigration statistics than Japan does.”
– Our immigration, both legal and illegal has sustained a lot of things.
– Exactly. Exactly. Including our positive population growth in the United States, right? Without immigration, we’d be very negative in terms of population growth. But bring that link back up, I want to show off these dolls. Scott, I saw this…there was a show on Amazon.
I think it was Amazon about James May traveling throughout Japan and he went to this town that essentially didn’t have any kids because, you know, the birth rate was lower, but then even the children that were there when they turned 18, they would, you know, move to a big city. They didn’t want to live there.
And so, yeah, just scroll through, let’s see some of these pics, I mean, they’re just absolutely creepy.
– Oh my gosh.
– Yeah. That could give you nightmares.
– Thank you for the nightmare fuel.
– Yeah. So I guess, zooming out really a big picture, we have demographic trends that point to a secular deflationary cycle, right? But we also have deficit spending, national debt that’s going to point to that inflationary supercycle.
So which one is going to win out? Personally, I don’t know. And I think partially, it depends on our immigration policy. So, you know, I don’t know how you could know that with your current information that you have today, but I guess my point is I wouldn’t necessarily just assume one or the other. And so I think it’s fine to hedge against inflation.
Like personally, I do think it’s wise to hedge against inflation and make investments that, you know, can outperform during a period of higher inflation. But at the same time, I think it’s a mistake just to say, hyperinflation long-term over the next several decades is baked into the cake. Therefore, I’m going to buy Bitcoin and it’s going to shoot up a million percent.
And by the way, one aspect that I think people overlook, whether they buy gold or digital gold, Scott, I want you to think about this. So I’ve heard it said that gold is a very stable store of value and that even though it’s, you know, somewhat volatile, it essentially you could pay 1 ounce of gold to the price of a man’s suit, like a British-made man’s suit, which I think is about 2,000 bucks, right?
So it’s pretty close to the long-run price of an ounce of gold. And that would’ve been the cost of, you know, a British-made suit 100 years ag,o or 50 years ago, or in the present day. It’s always to that 1 ounce of gold, regardless of how that 1 ounce of gold is expressed in nominal currency, in fiat currency.
So the argument goes that, you know, it’s a stable store of value, you know, that is safe from inflation. If you buy gold, it’s going to preserve its purchasing power, but this is the aspect that I think of a lot of investors ignore. Let’s say I buy an ounce of gold, okay?
And I don’t know what the price of gold is today. What is it? Close to 2,000 bucks? Let’s say I buy an ounce of gold, and then we enter, you know, this period of hyperinflation where our currency is debased 90%, right? So I bought my ounces of gold for 2,000 bucks, okay? The price of gold goes to what, $20,000, because our currency was, you know, debased by 90%.
So on paper, I’ve made 18,000 bucks if I then liquidate gold back into fiat, right? So I put in $2,000, got out $20,000 for an $18,000 gain. Now, what happened though to the purchasing power of that [inaudible 00:25:39]?
Well, what happened to its purchasing power though? According to this theory that, you know, an ounce of gold can always buy, you know, a custom British-made men’s suit. Well, if the currency has debase itself by 90%, then, you know, that suit once ounce of gold is worth $20,000 will also cost $20,000, right?
– So as gold preserved its purchasing power?
– Well, yes, it has.
– It has before you account for taxation, right? Because in the United States, we tax that gain, you know, once you cash out of your gold back into fiat, I believe it’s 28% plus state taxes. So every time you transact in and out of fiat, you know, you’re paying these taxes. And so what that does is it takes a huge bite out of this nominal capital gain.
But in my example, you didn’t make any real capital gain, right? It was all purely nominal. It was all purely based on currency debasement. So even if you do shift your assets into these real assets that theoretically are stores of value, once you convert them back into fiat, if you’re taxed on that transaction, then they don’t even end up being that great of an inflation hedge.
You know, certainly better than just putting those dollar bills in your mattress, but my point is that inflation policy, that, you know, financial repression, that debasement, it ends up taking a bite no matter what.
– So if you are one of those Bitcoiners that’s out there saying, it’s all Bitcoin, this is going to protect me against inflation. Andy, you’re saying, will it though? Will it remove, you know, any of these downsides for you because I’m not worried because all my money’s in Bitcoin?
– I mean, it certainly would still provide a lot of protection that’s [crosstalk 00:27:42], but it would not perfectly, you know, preserve purchasing power. And I definitely do think, you know, there’s a valid argument to be made to hold some crypto as a hedge against inflation, but you just have to keep in mind those transaction costs, you know, and the taxes you pay when you exit a position, very, very important.
You got to look at your triple net returns. You can’t just look at those nominal returns.
– So on the flip side then for, you know, someone who’s really into Bitcoin for that kind of inflation protection, what’s sort of the impact, kind of taking it back to Japan and what we were talking about demographics. If, in fact, looking really long-term deflation is going to be a problem, does that impact their kind of strategy there?
What’s the results there? Should they be concerned about that and say why?
– Well, if you’re investing in Bitcoin or crypto only because of inflation, then I think you would have to view long-term secular deflation as a risk for sure. But, Scott, you could almost describe, I think, crypto investors they seem to come in waves, and it seems to me that the latest wave of crypto investors are not necessarily as focused on inflation or monetary policy or Austrian economics as some of these earlier waves, some of the diehard Ron Paul guys or Goldbergs.
You know, in those earlier waves, I think, you know, you had your technologists, people really interested in the technology. You know, you had your day traders, your gamblers. You also had, I think a lot of investors focused on monetary policy, Austrian economics, but I think now with Ethereum, with some of these other smart contracts, just all the concepts of DeFi, I think a lot of people are betting on crypto as an app layer and just that bigger story of the ecosystem that it’s creating.
And so I think a lot of people’s investment thesis goes far beyond just crypto as an inflationary hedge.
– Right. And especially as crypto and the underlying technologies continue to establish themselves, it’s really just become a piece of so many investors’ overall portfolios. And it’s about managing risk. It’s about getting exposure to these new technologies.
So, you know, it’s not the same as it was at the beginning where you had a lot of folks out there saying, you know, I am just done with all these financial systems, this crypto thing, this is what I’m going to go all-in on.
– Well, you know, I will say this to give credit where credit’s due, if you got in early on Bitcoin because you said we’re in for high inflation and government spending is out of control and, you know, the Fed is just printing money and that’s out of control. If you got into Bitcoin in 2017 or, shoot, earlier, and then look at what’s happened. Number one to the price of Bitcoin.
Number two, look at what’s happened to our money supply in the United States, and how much money we’ve printed, and how our national debt has skyrocketed. You know, I think you could probably pat yourself on the back and say, “Well, I was definitely right. And I made this bet and it paid off in a big way. So let’s give credit where credit’s due.”
– Absolutely. Absolutely. Yeah. I want to go to Vegas with all those folks because they see things.
– Well, Andy, thank you again for joining me offering your insights. A lot of big things happening. It’s going to be exciting to see where it all goes, and we’ll see you on the next episode.
– Thanks, Scott.